The prospect of shrinking inflation, interest rate cuts and a soft economic landing in 2024 is good news for stocks, especially microcaps, which have market capitalizations between $50 million and $300 million. These small fries outperform larger companies when the economy is accelerating after periods of uncertainty. They also are cheap now—the Russell Microcap index has a price-to-earnings ratio of about 10 versus nearly 12 for the Russell 2000 small-cap index and 23 for the S&P 500 index. Caveats for investing in microcaps now…

Use active management. There are more than 4,000 publicly traded microcaps, most not covered by Wall Street. Managers can find undiscovered gems and avoid companies that could get clobbered by larger competitors.

Limit microcaps to a small portion of your portfolio—they can be volatile—and take a long-term perspective.

Funds to consider now…

Aegis Value (AVALX). Manager Scott Barbee takes an old-fashioned, deep-value approach. The fund is heavily invested in basic-material and energy companies. Performance: 8.89%.*

Oberweis Micro-Cap (OBMCX) ranks in the top 1% of its category over the past decade. It prefers pint-sized tech firms that produce positive earnings due to new product lines, a new CEO and favorable federal legislation and spending. Performance: 13.38%.

Wasatch Micro Cap Value (WAMVX) looks for companies with strong insider ownership and accelerating revenue and earnings growth. It is dominated by industrial and tech stocks and holds about 20% of assets in foreign microcaps. Performance: 10.4%.

*All performance figures from Morningstar, Inc.,  are 10-year annualized through January 29, 2024.

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